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Corporate governance, entrenched labor, and economic growth

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  • William R. Emmons
  • Frank A. Schmid

Abstract

The German system of codetermination contributes to the entrenchment of labor. We show in a two-period model of project choice that entrenched labor leads to underinvestment and overstaffing. We provide empirical evidence that German firms subject to codetermination with equal representation of workers on supervisory boards during 1989-93 were, on average, overstaffed. In addition, the fraction of employees in codetermined firms has decreased over time. The expanded reach of codetermination during the mid-1970s therefore may have contributed to the deterioration of German economic growth performance beginning at about that time through underinvestment, overstaffing, and costly migration of business activity away from firms subject to codetermination.

Suggested Citation

  • William R. Emmons & Frank A. Schmid, 2001. "Corporate governance, entrenched labor, and economic growth," Working Papers 2001-023, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2001-023
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    References listed on IDEAS

    as
    1. Franks, Julian & Mayer, Colin, 2001. "Ownership and Control of German Corporations," The Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 943-977.
    2. Stewart C. Myers, 2000. "Outside Equity," Journal of Finance, American Finance Association, vol. 55(3), pages 1005-1037, June.
    3. Gary Gorton & Frank Schmid, 2000. "Class Struggle Inside the Firm: A Study of German Codetermination," NBER Working Papers 7945, National Bureau of Economic Research, Inc.
    4. Halvorsen, Robert & Palmquist, Raymond, 1980. "The Interpretation of Dummy Variables in Semilogarithmic Equations," American Economic Review, American Economic Association, vol. 70(3), pages 474-475, June.
    5. Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
    6. FitzRoy, Felix R & Kraft, Kornelius, 1993. " Economic Effects of Codetermination," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(3), pages 365-375.
    7. Colin Mayer & Julian Franks, 2000. "Ownership and Control of German Corporations," Economics Series Working Papers 2001-FE-11, University of Oxford, Department of Economics.
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    Cited by:

    1. Christoph Walkner, 2004. "Issues in corporate governance," European Economy - Economic Papers 2008 - 2015 200, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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    Keywords

    Economic development; Corporations - Finance; Germany;
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